At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
After the holiday comes ... the hangover
After a long and I can only presume alcohol-drenched weekend, Mr. Market woke up with a killer hangover Tuesday -- and proceeded to sell everything in sight. Although losses were ultimately pared to a mere 100-point decline by market close, at one point yesterday, the Dow Jones Industrial Average (INDEX: ^DJI) was down more than 300 points!
Not all investors were panicking, though. To the contrary, as stock prices plummeted, levelheaded stockpickers at Jefferies & Co. pulled out their shopping lists and carefully ticked off the names they wanted to own, focusing on:
- Coal stocks -- with Alpha Natural Resources
, CONSOL Energy (NYSE: ANR) , Arch Coal, and Peabody Energy heading the list. (NYSE: CNX)
- Gold stocks -- Barrick Gold
made the cut; Kinross, Goldcorp, and Newmont Mining did not. (NYSE: ABX)
- And metals of a less precious variety -- namely, Alcoa
, BHP Billiton (NYSE: AA) , Rio Tinto (NYSE: BHP) , and Freeport-McMoRan (NYSE: RIO) . All are major metals plays, and each one is a buy in this analyst's book. (But not just this analyst's.) (NYSE: FCX)
Yesterday, we ran down Jefferies' list and crunched the numbers for coal and gold. Today, we'll take a look at the analyst's baser metals musings, beginning with...
As you may recall, we examined Alcoa in this very column just a couple weeks ago, noting the apparent attractiveness of the firm's 13 times earnings multiple and projected 36% long-term growth rate. Jefferies, too, finds the numbers attractive, arguing that years of underperformance have made Alcoa's valuation "reasonable." The analyst also keyed in on the strong free cash flow I highlighted last month, arguing that it's set to improve substantially in future quarters.
If anything, I'd say Jefferies is even more bullish on Alcoa's prospects than I am. Will it be proven right? Add Alcoa to your Fool watchlist and find out.
BHP Billiton and Rio Tinto
So far, no major media outlets seem to have details on why exactly Jefferies rates these two stocks a buy -- but I think we can guess. Much like Alcoa, they look very cheap -- BHP sells for just nine times earnings; Rio, seven times. Though Rio may appear cheaper, I have to say that I actually prefer BHP.
Consensus estimates show BHP growing nearly twice as fast as Rio over the next five years (nearly 17% per year). Plus, while neither company currently generates free cash flow at a level sufficient to back up its reported GAAP earnings, BHP looks to me to be the closest to bargain territory. The stock costs 13 times free cash flow. The long-debt load is modest at under $16 billion -- I know it sounds like a lot, but on a $220 billion market cap, that is modest. And relative to the growth rate, I think BHP offers a more than adequate margin of safety to Foolish investors.
It's not, however, the best bargain Jefferies dug up for us yesterday. To my Foolish eye -- and I admit that I'm biased, because I own the stock -- that best bargain is found at Freeport-McMoRan Copper & Gold. Priced at just 7.7 times earnings, it's cheaper than BHP and Alcoa. Freeport also generates nearly as much free cash as it claims as net income ($5.5 billion in all). So while Freeport's 15% annual projected growth rate may not be quite as speedy as many of the other metals and mining plays named in Jefferies' report, to me it looks plenty fast to justify the stock's price.
Toss in a tidy 2.2% dividend for good measure, and Jefferies calls Freeport its "top pick in North American Metal." I think so, too.
Time to chime in
Of course, that's just my opinion. Perhaps you have a different one? If so, we've got a place to state your case. Click over to Motley Fool CAPS now, and tell us which of Jefferies' favorite metals and mining stocks is your favorite, too -- and why. (Then add Freeport to your Fool watchlist, and check to see if your idea performs as well as mine.)